The Bitcoin Civil War Is On!

A man enters the Inside Bitcoins conference and trade show, Monday, April 7, 2014 in New York. Bitcoin users exchange cash for digital money using online exchanges, then store it in a computer program that serves as a wallet. The program can transfer payments directly to merchants or individuals around the world, eliminating transaction fees and the need for bank or credit card information. (AP Photo/Mark Lennihan)

Bitcoin, the preferred “currency” of child pornographers, drug dealers, and Russian hackers, is in jeopardy this week as a civil war has erupted, splitting the currency in two. Network effects suggest one side, or both, may fail as a result.

Bitcoin works by having a single global ledger of everyone’s holdings in Bitcoin. This ledger is called the “blockchain.” Independent of “cryptocurrencies,” the blockchain technology itself is very useful and interesting, but the currencies have seen limited adoption apart from speculators, ideologues, and criminals.

The notable properties of Bitcoin are that it resists property rights and privacy. It hinders property rights by making it impossible for government to roll back transactions made by thieves and scammers. Privacy is thwarted by making all transactions and holdings publicly visible, a key fact that helped the FBI take down Ross Ulbricht, founder of the Silk Road drug ring.

The blockchain technology was first tried out in Bitcoin, and as a result Bitcoin has design defects that were only learned during this first test at scale. The community has split on how to deal with the limits, and now a civil war has broken out over control of the currency.

One side has left the technology alone, and they’ve kept the name Bitcoin. The other side has made changes for scalability, and that side is now called Bitcoin Cash. Bitcoin Cash is gaining value rapidly during the transition period, making it very interesting to speculators, while Bitcoin has remained stagnant since the split.

How will retail adopters of the technology decide which to use though? The split could harm both sides, until one wins out.